The Minimum Wage: Use only as Directed

THE FIRST THING I learned in Public Policy school was that economics is not the study of money and finance… It’s actually the study of Tradeoffs – discerning whether you’re getting back more than you’re giving away by identifying true costs and measuring real payoffs.

The second thing I learned was the criticality of correctly defining our problems. Otherwise, the tradeoffs we select to solve them end up unwittingly addressing the wrong issues and yielding us unintended consequences instead of intended payoffs.

Today, some 75 years after President Roosevelt instituted America’s minimum wage law, President Obama believes the time has come to raise it for a 23rd time. He sounded his call this way in a December 4 speech:  “We know there are airport workers and fast-food workers and nurse assistants and retail salespeople who work their tails off and are still living at or barely above poverty (See RM #23)…that it’s well past the time to raise a minimum wage that, in real terms right now, is below where it was when Harry Truman was in office.”

Before we judge the propriety of President Obama’s call, let’s first take a step back and define the problem that the minimum wage helps solve.

America’s Perpetual Quest for Fairness

If Americans have one overriding value – one single paramount principle – it’s “Fairness.” Our ideal world is embodied in Kid Rock’s refrain, “You get what you put in, and people get what they deserve!” The more pervasive fairness becomes, the happier we generally become … the more “right” our world seems to be. Americans intuitively feel that people who work hard and try hard should receive enough reward for their labors to want to keep going – to want to keep trying – to want to keep working hard.

Americans by and large agree:  hard working people should be comfortable in life; they deserve at least that much. We want even the most unskilled among us to conclude that their daily exertions are worth it…so they won’t quit – drop out, stop growing, stop contributing to society, and become a burden to society.

So our “problem” – our objective – is to develop an economic system (a system of tradeoffs) where Americans who try hard enough get rewarded “enough.” The minimum wage is just one component of that system. And it can only do so much, because it only works well if it's used “as directed.” Setting the minimum wage level is analogous to taking aspirin:  one tablet does nothing, two or three are ideal, four tablets have short term benefits but long term drawbacks, and dosages of five or more tablets are just plain dangerous.

The Minimum Wage:  Only one Piece in our "Economic Ladder" Puzzle

In 1950, President Truman raised the federal minimum wage to 75 cents an hour. Today, it’s $7.25 an hour and President Obama suggests it hasn’t kept up with inflation. Well, his “two cents” on this issue is appreciated because 75 cents in 1950 is $7.27 cents today (Bureau of Labor Statistics, CPI Calculator), which means the minimum wage has indeed fallen behind the pace of inflation by a whopping two cents…

Ideally, the federal minimum wage should never be higher than the wage that the state with the lowest cost of living can afford to pay its young and unskilled workers. In other words, the point at which businesses in Mississippi stop hiring unskilled and low skilled workers because they can’t afford to pay their requisite wage is the point that the federal minimum wage should never reach. Otherwise, Mississippi’s economy gets punished because its business owners can’t afford to pay the wages that business people in Connecticut and California, where the cost of living is much higher, can afford to pay.

Keeping the federal minimum wage where it’s stayed, in real terms, virtually since its inception is our best path. Reason being:  states like Mississippi appear to be sufficiently competitive, and dozens of other states and localities, including the District of Colombia, can still choose to raise their individual minimum wage levels however they see fit. Today, Missouri’s minimum wage is ten cents higher than the federal level. Washington State’s is $1.94 higher.  

Having a $5 minimum wage is like taking one aspirin – it’s useless. A $7.25 federal minimum wage is like taking two aspirin, because states and localities can opt to take a third one… Minimum wages above $10 are like taking four aspirin – they boost the economy in the short term, but the “system” can’t tolerate that dosage for very long because once profit margins begin shrinking, businesses begin searching for ways to survive without the help of young, inexperienced workers. Finally, minimum wages of $15 or more an hour are analogous to taking five aspirin or more because they're economically toxic – not only for the young and unskilled workers who don't get hired because of them, but also for the businesses who can’t afford to become more automated.

All the other Puzzle Pieces

Remember:  our objective is to provide the employees working on the lowest rung of our economic ladder the means and motivation to sustain themselves and keep climbing it. But we aren’t helping them climb that ladder if we cut its lowest rung off, which is precisely what would happen to our youngest and least skilled workers if we price them out of the workforce with an excessively high minimum wage.

It’s much better, rather, to consider the minimum wage in the context of all the other supportive components our current tradeoff system has, none of which were around when Harry Truman was President.

We should index the federal minimum wage to inflation at its current level and recognize the numerous other programs that young and unskilled workers are currently benefiting from such as Obamacare, with its expanded Medicaid eligibility, insurance premium subsidies, and allowance for people under 27 – the main demographic for minimum wage earners (see above graph) – to stay on their family’s health insurance policies. 

 Many minimum wage workers are also eligible for the Earned Income Tax Credit, food stamps, transit subsidies, educational assistance, child tax credits, nutritional support for their school children, housing subsidies, home energy assistance programs, assistance for single mothers (WIC & TANF), educational services, federal and state children’s health insurance programs (CHIP/SCHIP), and other state-sponsored/state-augmented anti-poverty programs such as job training and locally heightened minimum wages.

Today’s Economic Ladder “puzzle” has more pieces in it than ever before. The federal minimum wage is only one of them and it, frankly, is already “in its place.” There really isn’t much more we can safely do with it, because we’re already “taking it” at its recommended dosage... We should however keep adjusting it for inflation at the federal level and leave it to the states, districts, counties, towns – and even airports – to set higher minimum wages if they like. We should let localities seed the wage policies they prefer…and then let them reap the payoffs and unintended consequences they deserve.